Guide to overpaying your mortgage

Making overpayments on your mortgage could save you more money than you earn from your savings, depending on the interest rate on your mortgage. Read our guide to what you need to know.

Making overpayments on your mortgage could save you more money than you earn from your savings, depending on the interest rate on your mortgage. Read our guide to what you need to know.

Daniel Evans
From the Mortgages team
minute read
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Posted 23 DECEMBER 2020

When is it a good idea to overpay on my mortgage?

If you have money to spare, you could make overpayments on your mortgage rather than putting it into a savings account. Check with your provider first, though, as you may have to pay a fee to do this.

At the moment, the interest you can earn on your savings is at an all-time low, which means you could benefit from overpaying on your mortgage, reducing the overall interest you pay and shortening your mortgage term.

Mortgage deals with competitive interest rates tend to be available to those who have more equity in their property. Overpaying on your mortgage will increase the equity you have (the portion of the property you own from paying off your mortgage), which can help you get a better deal if you decide to remortgage.

Top Tip 

If you want to overpay on a repayment mortgage, make sure the money goes towards paying off the overall balance, not just the interest. When you speak to your lender, tell them you want to use overpayments to reduce the term of your mortgage.

What do I need to consider before overpaying on my mortgage?

If the interest you earn on your savings account is higher than the interest you pay on your mortgage, it might be more beneficial to save. However, if your mortgage rate is higher, then paying off more of the mortgage debt might make more sense. The logic is that it’s better to save paying £3 in interest than to earn £2 in interest.

But there are still some things you need to consider before you overpay.

Are there any penalties?

Many lenders have a limit on how much you can overpay by each month or in a 12-month period – typically around 10% per year if you’re in a short-term, fixed rate period.

If you’re on a standard variable rate (SVR), you can usually overpay as much as you want. The downside is that SVRs are expensive, so at this point you might be better off remortgaging rather than overpaying.

Some mortgage lenders charge an early repayment charge (ERC), which can also apply if you pay off your full mortgage early. This is usually between 1% and 5% of the amount overpaid, although this can vary depending on the mortgage deal you have.

ERCs don’t mean that you shouldn’t overpay, but you’ll need to ensure that the savings outweigh any penalties.
Always check the terms and conditions of your mortgage and speak to your lender before you make overpayments.

Pay off more expensive debts first

It’s important to prioritise your debts and pay off the most expensive ones first. If you have any unsecured credit, like high-interest credit cards or loans, they’ll usually come with a higher rate of interest than a mortgage. If these debts are costing you more than your mortgage, it’s a good idea to pay these off first.

Overpay or reduce the mortgage term?

If you can, overpay rather than ask your lender to reduce the length of your mortgage.

Both have the same outcome – higher monthly payments, less interest and a shorter mortgage term. But if you’re locked into an agreement to pay higher monthly payments, you might find yourself struggling if your circumstances change or you’re on a variable rate and the interest rates rise.

By overpaying you can vary the amount on top of your set payments each month, or even stop overpaying altogether if you need to.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Should I still be putting money in a savings account?

If you decide to overpay on your mortgage, it can still be a good idea to keep back some savings to cover any unexpected emergency costs, as you may not be able to request the money back from your mortgage once you’ve overpaid.

It’s also worth finding out if the interest on your mortgage is calculated monthly, quarterly or annually, to maximise the benefit of overpaying.

If your interest is not due to be calculated for a few months to a year, you could put your money into a high interest savings account before using it to overpay on your mortgage.

Again, your mortgage provider will be able to tell you about any penalties for overpaying.

Should I overpay my mortgage?

If there are no penalties for overpaying, it could help you save money in the long run. And you don’t have to overpay a large amount each time. Just £50 or £100 more each month could help reduce the interest you pay and shorten the length of your mortgage.

But the decision to overpay shouldn’t be taken lightly. Savings rates may be at an all-time low, but the coronavirus pandemic has caused a great deal of economic instability. Take a good look at your finances and your circumstances, and ask yourself if you can really afford to overpay.

Always check the terms and conditions of your mortgage and speak to your mortgage lender before making overpayments.

Need mortgage advice?

Mortgages are complex financial products, so it’s important to take your time to find a great deal and consider your options.

We’ve partnered with London & Country Mortgages Ltd (L&C)** to provide you with fee-free mortgage advice. Get in touch with one of their expert advisers here.

Go to L&C mortgages 

**London & Country Mortgages Ltd (L&C) are a multi-award winning mortgage broker with over 20 years’ experience in helping people secure their perfect mortgage. Advice is provided by L&C, who are authorised and regulated by the Financial Conduct Authority (143002).
L&C are not part of Compare the Market Limited. Compare the Market receives a % of the commission that our partner London & Country earns. All applications are subject to lending and eligibility criteria.

L&C will not charge you a broker fee should you decide to proceed with a mortgage.

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